THOMPSON FALLS -- Gov. Brian Schweitzer has asked Attorney General Mike McGrath to conduct a criminal investigation into whether the former owners of a Thompson Falls power plant provided fraudulent information to the state in order to obtain a massive reduction in fines for continually violating air quality standards.

Schweitzer's request was prompted by a letter to the governor from the Missoula-based Clark Fork Coalition and signed by seven Sanders County residents.

The letter asked Schweitzer to request an investigation into the circumstances surrounding the Montana Department of Environmental Quality's decision to reduce a $1.8 million fine against Thompson River Co-Gen to $200,000.

It also asked the governor's office to undertake a review of laws and policies "that led DEQ to go to such lengths to meet the demands of a company with such a record of dishonesty."

"We understand that Montana has environmental laws governing enforcement," the letter went on, "but we cannot believe those laws require DEQ to assist convicted criminals in fleecing the people of this state."

Barry Bates of Kalispell, a partner in Thompson River Co-Gen along with Lawrence M. Underwood of Denver, was sentenced last year for failing to file income tax returns from 1999 to 2003. According to U.S. Attorney Bill Mercer, Bates received income on various investments and interests of more than $1.8 million during the period he did not file returns.

Bates told Internal Revenue Service officials he didn't file tax returns because he did not have the money to pay his tax liability due to some bad investments.

However, Mercer said a review of Bates' financial records from 1999 to 2003 showed that during the period where he said he didn't have the money to pay his taxes, Bates purchased a vacation home for $370,000 cash, made an $80,000 down payment on another home, bought a 2002 GMC Yukon and invested $300,000 in a business venture with his father-in-law.

It is unclear whether that business venture was Thompson River Co-Gen, which opened on Dec. 2, 2004, burned coal and waste wood to produce the electricity it sold, and operated for just 9 1/2 months before closing down after being charged with exceeding the nitrogen oxide and sulfur dioxide emission limits allowed by its initial permit from DEQ.

At the time, DEQ senior environmental science specialist Karen Wilson called the violations "major." They included Thompson River Co-Gen exceeding its nitrogen oxide limits 714 times over a 40-day period, and exceeding its boiler heat limit over hundreds of hours when the boiler's data recorder was working which wasn't all the time, another violation.

DEQ lowered the fine to $200,000 after an independent review by the Cambridge, Mass., firm Industrial Economics showed Thompson River Co-Gen didn't have the money to pay any more.

"The decision I faced, and I don't know if it was the right call, was whether it was better to collect $200,000, or fight for another year for $1.8 million we'd probably never see," DEQ director Richard Opper said Friday. "It uses a lot of time and resources to go that route, through the courts."

Opper said Industrial Economics told DEQ it found $176,000 in an escrow account, but otherwise the company "didn't have any money, and it would be a waste of time taking them to court."

What raised eyebrows at the Clark Fork Coalition was that about the same time DEQ settled Thompson River Co-Gen's fine for about 10 cents on the dollar, news was breaking that the power plant had a new owner: a Minnesota firm called Wayzata Investment Partners.

Industrial Economics "specifically asked (Thompson River Co-Gen) whether any sale of the plant was on the horizon," the letter to Schweitzer said. The answer was no.

"The entity that Wayzata Partners formed to hold the plant (renamed Thompson River Power) came into existence on Nov. 9, 2007, exactly one week before the settlement was signed," the letter to Schweitzer said. "It is inconceivable that the sale was not 'on the horizon' at the time of the settlement, and when the financial report was prepared."

But Opper said Friday that "what we've heard from some folks involved with Barry Bates is that he and his partner defaulted on a loan," and Wayzata Partners came into ownership of the plant that way, not by buying the power plant directly from Bates and Underwood.

"If that's true, it does support their contention that they didn't have the money to pay a $1.8 million fine," Opper said.

Still, Opper welcomed the attorney general's investigation.

"If they find it's a case that, yes, DEQ was duped, then yes, we're justified in going after the full fine," he said.

The letter to Schweitzer also questioned what it said was DEQ's agreement to allow Thompson River Co-Gen to submit relevant information only to Industrial Economics, and not to the state.

"Moreover, DEQ agreed that all copies of this information would be returned to (Thompson River Co-Gen) once the report was complete," the letter said. "As we understand it, the express reason for this arrangement was to keep the underlying documents from becoming public.

"So we find ourselves in the following situation. TRC said it couldn't afford to pay the fine. But the state can't prove that TRC lied, because it bent over backwards to help TRC keep its representations secret and, even more incredibly, to prevent itself from learning the basis on which it was being asked to reduce the fine. We are shocked that our state government would grant such a request from any company. But in the case of TRC, the state's behavior defies explanation."

It cited Bates' federal income tax violations; a 1999 $20,000 fine imposed on Bates in connection with charges of federal securities fraud brought by the Securities and Exchange Commission; an earlier $106,000 fine by DEQ against Thompson River Co-Gen for deliberately violating air quality standards; and a 2004 decision in which it said Thompson River Co-Gen was forced to repay a $10.5 million subsidized loan after the Montana Board of Investments learned that the company's earlier statements that it had obtained all the necessary permits to build its power plant were false.

In a letter to Clark Fork Coalition president Tom France, Schweitzer said he was taking action on both the request for an investigation by the Attorney General's Office and the request for a review of the laws and policies DEQ relied upon in reaching the settlement agreement.

"You have brought forward serious allegations," the governor wrote, "and I believe they deserve formal review."

In his letter to McGrath Thursday, Schweitzer asked for an investigation of the allegations "to determine whether you believe criminal conduct has occurred, and if so, what course of action should be pursued."

The power plant itself remains idle.

Reporter Vince Devlin: e-mail vdevlin@missoulian.com; call 1-800-366-7186.